When start-ups fall flat, millionaire wannabes don't always exit gracefully
Two officers and a detective questioned her for 45 minutes in the lobby of Bank of America's Queen Anne branch, asking her to explain why the account number on the checks, totaling $2,500, wasn't Websuite's.
"It was extremely embarrassing," said Pheasant. "They treated me respectfully, but very firmly. I couldn't leave the building."
Pheasant and dozens of other former Websuite workers still haven't been paid, because the SeaTac company filed for bankruptcy protection — after a takeover that involved armed guards.
They aren't alone. Stories gleaned from court records and interviews with attorneys and creditors detail how failing local start-ups are bungling layoffs and shutdowns. They're depriving employees of wages and medical benefits, sticking creditors with millions of dollars in unpaid bills and letting lawyers clean up the messes.
More than 300 dot-coms have gone bust so far this year, compared with 190 in all of 2000. The tally includes at least three dozen Puget Sound-area companies, and would be higher if it included those that dissolve themselves quietly.
Experts point to the demise of Webvan, which burned through $800 million in start-up funds, as a sign that bigger New Economy companies are starting to go bust. Some foresee carnage among telecommunications companies, which have spent billions to build fiber-optic networks that are largely unused.
If the builders of the New Economy knew little about turning seed capital into profit, they knew even less about how to exit gracefully when the money ran out. Strapped for cash and embarrassed by failure, many simply turned off the lights and ran.
"From afar, we look at founders as sophisticated business people who have taken the time to educate themselves about basic practices," says Deborah Crabbe, a bankruptcy attorney in Seattle. "But a lot of people in the tech sector didn't."
A very hostile takeover
Websuite's demise demonstrates how little recourse employees have in cases where wages and benefits are unpaid.
The company bounced $18,900 worth of paychecks after laying off 30 people last September. It also failed to forward payroll taxes to the government and stopped paying health- and dental-insurance premiums even though it deducted those costs from employees' wages. While potentially criminal, the offenses are difficult to prosecute and rarely go to court.
Christian Ryser was stuck with $3,500 in medical charges after his third child was born last August. The following month, the company laid Ryser off. State assistance covered only some of the costs. "It was pretty painful," he says. "We're still paying off about two grand."
Websuite showed promise for a while. It hosted Web sites for real-estate agents and taught them how to use the Internet. More than 1,000 people took the $299 course, which was endorsed by the National Association of Realtors. At one point last year, $20,000 a day poured in, said former controller Keith Cripe.
Websuite quickly grew from 15 to 90 employees. Then sales slowed. The company burned through its cash. By June of 2000, Cripe had stopped paying bills.
In September, operations manager Dave Cleveland and his business partner, Dennis Hinton, thought they had a deal to buy Websuite for $3.5 million. But 10 days later, founders Keith and Kirk Klinkhammer signed an agreement selling the business to Summitt Healthcare, a Las Vegas company headed by Mark Anderson.
Anticipating hostile employees, Anderson and the Klinkhammers brought armed security guards in as they announced Summitt's takeover on a day Hinton and Cleveland were out of town.
Darryl Barlett, the company's 53-year-old technology officer and the senior manager at the office that day, said he called SeaTac police and asked to have the bouncers removed. Instead, guards escorted Barlett and three other senior managers out.
"They showed up with a bunch of greasy thugs and threw my people out," Cleveland said.
In the following days, Cripe handled a stream of phone calls from creditors, telling them Anderson had promised to put money into the company. But the money failed to turn up, so payrolls kept bouncing, Cripe said.
Anderson didn't respond to requests for comment. Keith Klinkhammer, Websuite's former chief executive, declined comment.
Late last year, several former employees tried to force Websuite into liquidating assets to pay creditors. But Websuite quickly filed for bankruptcy protection on its own. Its products have since been licensed to another company that agreed to share revenue, if it makes any, with creditors. But Websuite's former owners remain shielded from $3 million in debts, including $108,000 owed to employees.
"If I ever work for a private business like that again," says Patrick Sweeney, Websuite's former database administrator, "I'm going to do a lot more investigating."
Shutdown but no bankruptcy
Most dot-coms shut down outside of court, rather than in bankruptcy, which can easily cost $100,000 in legal fees. Business bankruptcies have declined nationwide since 1997, and they fell 11 percent in Washington in the first quarter, even at a time dot-coms were failing at a rate of nearly two a day.
Since start-ups usually have little to protect beyond computers and office furniture, it is simpler and cheaper to just dissolve and pay debts, even if creditors only get pennies on the dollar.
That's what bazillion.com did. It turned off its high-speed Internet service in January without telling subscribers, then hired security guards to clear employees out of its offices south of Pioneer Square.
But bazillion didn't bother filing for bankruptcy protection. Instead, it simply failed to show up in court when creditors sued for $4.8 million, most of it owed to a leasing arm of Cisco Systems and to a telecom equipment unit of Little Rock, Ark.-based Alltel Corp.
"We haven't heard a word from them," says Al Van Kampen, a Seattle attorney who represented Alltel, and says the company isn't pursuing the matter. "It costs money to chase a judgment, and no client likes to throw good money after bad."
Bazillion also stiffed employees for about a week's wages and some expenses. Under Washington law, company officers can be held personally liable for failing to pay employees. But it is up to the employees to prove in court that managers intended not to pay. "I didn't have the money to talk to a lawyer," says Josh Porterfield, who worked at bazillion for a year. "Your unemployment definitely doesn't cover that."
Dot-com workers are typically young and able to bounce back from adversity. Tim Shakarian, a programmer at Websuite for four years, found a new job three weeks after being laid off. He's 22 and earns more than $60,000 a year. Pheasant, who was questioned by police for trying to cash her paychecks, is now the executive assistant to RealNetworks' chief financial officer. Both accept that the money Websuite owes them is long gone.
Vern Fotheringham, bazillion's former chairman, says employees know start-ups are risky. "I'm not hanging my head or feeling guilty," he says. "By definition, every start-up is a bankrupt company, so you're in a pretty tough environment from the get-go."
In some cases, dot-coms frittered money away on expensive office furniture, even golf clubs. Reflex Communications bought more than 90 custom-made desks and a wooden coffee table with the company's "R" logo inlaid on the top to outfit offices in Pioneer Square. It left $26 million in debts when it went bust in April.
Bazillion and iStart Ventures, which was supposed to "incubate" other dot-coms, spent $98,000 buying 140 Herman Miller Aeron office chairs at $700 a pop. The chairs were sold at an auction in April for as little as $325 each.
"These people were buying hugely expensive stuff," said Bruce Kriegman, the trustee in the Websuite case. "The venture capitalists were telling them, `You want more money? Well, spend what we've given you!' "
Some founders walk away. Others try to take the company with them. In one pending case, eight computers and other equipment vanished from the office of a small Seattle start-up after it failed. The founder is hanging on to the intellectual property, claiming he never formally signed it over to the company.
"We shouldn't have to spend a bunch of money fighting about stuff like this," says Shelly Crocker, a Seattle bankruptcy attorney. "It offends me morally that somebody who built up a business and owes people a lot of money would not stay behind and clean up the mess."
Before the money's gone
Creditors are getting more savvy about demanding payment before troubled companies go under. Sheriff's deputies froze Network Commerce's bank account in May after the Internet-services company missed $600,000 in lease payments for software.
Fearing the company would go bust, the Bellevue branch of California-based Silicon Valley Bank argued it needed to stop Network Commerce from "secreting, wasting or moving the property out of state" after bank officers visited the company's Pioneer Square office in April.
"We observed a steady flow of workers using hand trucks to wheel computer hardware out of the building," Scott Bergquist, a bank vice president, said in a deposition. He reckoned Network Commerce had spent $17 million in five weeks and would soon run out of money.
The bank's aggressive stance paid off. Network Commerce made the missed payments in June. Now the bank hopes Network Commerce survives until September so the payment will be beyond the claims of other creditors should the company fail. Under law, creditors can call back unusual payments made up to 90 days before a company files for bankruptcy. In some cases, a paid-off creditor actually has to refund money so it can be shared among other creditors.
Landlords have had a rude awakening, too. Many thought they were being cautious by demanding letters of credit that could be cashed in if a tenant missed rent or bailed. But those letters don't work like cash.
In one local case, the landlord and tenant negotiated extensively over a $200,000 letter. But when the tenant missed payments, the landlord discovered it was never handed over. "Asking for it later when the tenant's in trouble doesn't do you any good," says lawyer Cynthia Thomas.
Convergent Communications, a big Denver-based telecom company, negotiated to break its lease on 10,000 square feet of space in the Touchstone Building in Kirkland. Then, "they moved out in the middle of the night" without paying, says Thomas, who represents the owner.
Convergent sought bankruptcy protection in April, and the debt is part of $682 million it owes. Three days later, however, Convergent took top-performing employees on a weeklong tropical cruise.
The company had already paid for it.
Alwyn Scott can be reached at 206464-3329 or ascott@seattletimes.com.